Fractional Investments and 1031 Exchanges

Why More Investors Are Choosing Passive Replacement Property

At IPX1031, we are seeing a growing number of investors utilize 1031 Exchanges as an opportunity to transition away from management-intensive real estate and into more passive Replacement Property strategies.

TL;DR: Fractional real estate investments, including DSTs, Triple Net Lease (NNN) properties, and TICs, allow investors to complete a 1031 Exchange using passive, professionally managed Replacement Property. Fractional strategies broaden the range of Replacement Property options, which may give investors greater alignment with their long-term goals, risk tolerance, and stage in the investment lifecycle.

As highlighted in our recent annual outlook, demand for fractional investments like Delaware Statutory Trusts and Triple Net Lease properties continues to increase. Many investors are prioritizing passive income, estate planning flexibility, and simplified ownership rather than active property management.

Understanding how these structures work and how they fit within a 1031 Exchange can help investors make more informed, strategic decisions regarding their next move.

What Is a Fractional Real Estate Investment? 

A fractional investment allows multiple investors to own a portion of a larger property rather than owning and managing 100 percent of a property themselves.
Instead of overseeing tenants, maintenance, insurance, and capital improvements, investors own a proportional interest in professionally managed real estate.
Common fractional Replacement Property options used in a 1031 Exchange include:

• Delaware Statutory Trusts (DST)
• DST structures with potential UPREIT exit strategies
• Triple Net Lease (NNN) properties
• Tenants in Common (TIC) structures

Key Strategic Fractional Investment 1031 Takeaways

• Triple Net Lease (NNN), Tenants in Common (TIC), and Delaware Statutory Trust (DST) fractional investment structures can qualify as like-kind real estate for 1031 Exchange Replacement Property
• Fractional structures for 1031 Replacement Property are increasingly used by investors transitioning out of management-intensive Relinquished Property and seeking passive ownership
• Fractional Replacement Property strategies may be well suited for investors prioritizing tax deferral, diversification, estate planning flexibility, and reduced operational involvement

Delaware Statutory Trusts (DSTs) in a 1031 Exchange

A Delaware Statutory Trust, commonly referred to as a DST, is a legal entity that holds title to real estate. Investors purchase beneficial interests in the trust, which represent fractional ownership of the underlying property.

DSTs often hold professionally managed multifamily, industrial, medical office, self-storage, and Triple Net Lease assets. DST offerings can vary in risk profile, leverage structure, and investment strategy.

DSTs qualify as like-kind real estate for 1031 Exchange purposes under IRS Revenue Ruling 2004-86. DST investors do not actively manage the property, making this structure attractive for those seeking passive ownership.

How a DST Works in a 1031 Exchange

• The investor structures the sale of their Relinquished Property as a 1031 Exchange
• The investor identifies a DST as their Replacement Property within the required identification period
• The investor acquires a fractional beneficial interest in the trust, which holds title to the underlying real estate
• Professional asset managers operate the property
• The investor receives proportional income distributions based on their ownership percentage, typically derived from the property’s rental income
• DST Exit Strategy: The decision to sell the property is made by the trustee/sponsor in accordance with the trust agreement. Upon the sale, investors receive their proportional share of the net sale proceeds. At that time, investors may choose to:
  • Complete another 1031 Exchange
  • Reinvest in another DST or direct real estate
  • Take cash and recognize taxable gain

Investors should consult their tax and legal advisors regarding their specific situation.

What Is an UPREIT and How Does a 721 Exchange Work?

Some DST offerings are structured with a potential long-term transition into an UPREIT (Umbrella Partnership Real Estate Investment Trust) structure.

An UPREIT allows real estate to be contributed into a Real Estate Investment Trust’s (REIT) operating partnership under Section 721 of the Internal Revenue Code which generally permits tax deferral on the contribution of property in exchange for operating partnership (OP) units.

Triple Net Lease (NNN) 1031 Exchange Properties

Triple Net Lease (NNN) properties are another common passive Replacement Property option.

In an NNN structure, the tenant is responsible for paying property taxes, insurance, and maintenance expenses. The owner receives rental income while having minimal day-to-day management responsibilities.

Some investors purchase 100 percent of a single NNN property as their Replacement Property. Others invest in DST structures that hold NNN assets. Both structures can qualify for 1031 Exchange treatment if properly structured.

Tenants in Common (TIC) Structures

Tenants in Common structures allow multiple investors to hold deeded fractional ownership in a property.

Unlike a DST, TIC investors typically hold direct title to a percentage of the property. While TICs can qualify as Replacement Property in a 1031 Exchange, they often require unanimous consent for major decisions and can be more administratively complex.

How Fractional Investments Fit Into a 1031 Exchange

When completing a 1031 Exchange, investors must:

• Identify Replacement Property within 45 days
• Close on Replacement Property within 180 days
• Reinvest required equity
• Replace required value of debt
• Follow all IRS guidelines

DSTs, TICs, and direct Triple Net Lease ownership all qualify as real property for 1031 Exchange purposes when properly structured.

Is Fractional Replacement Property Right for You?

Fractional investments may be appropriate for investors who:

• Are exiting management-intensive Relinquished Property
• Want passive ownership
• Seek geographic diversification
• Prioritize estate planning flexibility
• Want to maintain tax deferral through a 1031 Exchange

They may not be ideal for investors who:

• Prefer hands-on asset control
• Want to actively reposition properties
• Seek short-term value-add strategies

Choosing the Right Replacement Property Strategy for Your 1031 Exchange

Fractional real estate investments, including Delaware Statutory Trusts and Triple Net Lease properties, have become increasingly important tools in today’s 1031 Exchange landscape. For investors transitioning out of active management, these structures can offer passive ownership, diversification, and continued tax deferral. For other investors, direct ownership or value-add strategies may remain the better fit.

As the 1031 Exchange environment continues to evolve, investors are no longer choosing between “active or nothing.” They now have a spectrum of Replacement Property options designed to align with different phases of their real estate lifecycle. The right Replacement Property strategy ultimately depends on your investment goals, income needs, risk tolerance, and long-term planning objectives.

Understanding those options is the first step toward making a more strategic exchange. When you’re ready to move forward, contact IPX1031 to structure your exchange with clarity and confidence.

Frequently Asked Questions About Fractional Investments and 1031 Exchanges

IPX1031 – Choose the Experts

IPX1031 is the largest and one of the oldest Qualified Intermediaries in the United States. As a wholly owned subsidiary of Fidelity National Financial (NYSE:FNF), a Fortune 500 company, IPX1031 provides industry leading security for your exchange funds as well as considerable expertise and experience in facilitating all types of 1031 Exchanges. Our nationwide staff, which includes industry experts, veteran attorneys and accountants, are available to help you and your legal and tax advisors. For additional information regarding IPX1031 and questions on 1031 Exchanges, please review:

1031 Exchange and Defer? Or Sell and Pay Taxes?
Opportunities of the 1031 Exchange
How Important is Your Qualified Intermediary?
Capital Gains Estimator
IPX1031 Knowledge Center